They have chosen not to remove Russia from SWIFT, the dominant system for international financial transactions.
A torrent of financial sanctions was imposed on Thursday in response to the Russian invasion of Ukraine. These sanctions are intended to punish, isolate and impoverish Russia over the long-term. President Joe Biden announced sanctions against Russian banks, state-controlled businesses and embargoes on Russian exports.
However, Mr. Biden denied that Russia could be removed from SWIFT despite repeated requests from U.S. legislators, world leaders and Ukrainian officials. Although the president emphasized the necessity to block Russia from SWIFT he also stated that it is “always” an option. However, he said that this was not the position the rest of Europe wants to take. He suggested that the sanctions would be more effective.
Biden responded to a question on Thursday, “The sanctions that we’ve imposed exceed SWIFT.” Let’s have another conversation in a month to see if it’s working.
SWIFT was founded in 1973 by a member-owned cooperative in Belgium. It provides secure global financial messaging. It connects more than 11,000 institutions in more than 200 countries. SWIFT is a vital communications link for commerce around the world. Last year, 42 million securities and payments were processed per day via their messaging. This was more than 11% higher than the previous year.
It stands for Society for Worldwide Interbank Financial Telecommunications. About half of all high value payments crossing national borders pass through its platform. Some European leaders, including the United Kingdom, are still keen to block Russia from SWIFT.
Bans have consequences
While Ukraine wants Russia to be excluded SWIFT, several European leaders prefer to remain patient as a ban on international trade could cause more problems and harm to their economies.
“A lot of countries are hesitant because it has serious consequences for them,” stated Mark Rutte, the Dutch Prime Minister. He believes that a ban should only be used as a last resort.
According to the British government, Prime Minister Boris Johnson demanded that Russia be expelled from SWIFT at a virtual meeting of Group of Seven leaders on Thursday. Although it said that there was no resistance, the group agreed that further discussion was necessary. Officials from the UK refused to confirm that Germany was resisting.
U.S. lawmakers called for Mr. Biden’s deployment of all financial sanctions, with Senator Republican Leader Mitch McConnell stating Thursday that America should “ratchet up the sanctions all the ways.” Do not hesitate to use any of the tough sanctions available. You should use every tough sanction available and you should do so now.
Senator Jim Risch, Idaho’s top Republican, stated that the SWIFT ban will be difficult and time-consuming because the U.S. has no control over the decision.
Problem is, Russia might not be as isolated from the global economy by banning it from SWIFT. There could also be backlash in the form slower international growth. Rival messaging systems could also gain users in ways that weaken the U.S. Dollar — all of which has rendered SWIFT a sanction to be used.
Adam Smith, a former lawyer in the Obama administration, stated that it is a communications platform and not a financial payment system. “If Russia is removed from SWIFT they are removing them form a key artery in finance. However, they can still use pre-SWIFT tools such as telephone, telex, or email to conduct bank-to-bank transactions.
Terrorists and China a gift?
Another risk is that countries might move their institutions to platforms not owned by SWIFT, like a Chinese system. This could increase friction in global commerce, which would hurt growth and make it more difficult to monitor terrorist group’s finances.
Brian O’Toole, an Atlantic Council senior fellow and former Treasury official, stated that by politicizing SWIFT others will be motivated to find alternatives. “SWIFT is also an important partner in U.S. and European counterterrorism efforts. It has shared data with the U.S Treasury on counterterrorism issues, which has proved to be extremely valuable.
Clay Lowery, of the Institute of International Finance, stated that Thursday’s sanctions would still achieve much of what would happen to Russia if it lost SWIFT access.
Lowery stated that “Cutting these financial institutions off from using the dollar, euro and pound sterling, [that is] still a fairly significant step.” Through sanctions, you’re having the exact same effect on certain sections of the Russian economy.”
SWIFT bans Iran from SWIFT
Because of Iran’s nuclear program, the SWIFT system was shut down in 2014. Dmitry Medvedev, then the Russian Prime Minister, stated that losing SWIFT access would be like declaring war on Russia. Medvedev’s statement is an indication that Russia saw the platform as vulnerable and devised workarounds to minimize economic damage in the future.
Smith stated that he believes it will cause harm in the short term, as well as psychologically, but that it won’t have a positive impact on the Russian economy in a way that makes it worthwhile.
Experts say Russia is already preparing for ways to avoid sanctions, including those that were imposed this week.
Ari Redbord is a former Treasury senior advisor who said that he expected Russia’s leadership not to be subject to financial penalties that would limit its ability to participate in the global financial systems through increased cryptocurrency use.
Redbord stated that this was a risk, especially when actors such as Iran, China, and North Korea continue to trade with Russia without the formal financial system.
He stated that if Russian banks were completely cut off from the U.S. financial system and European financial system, it would be very debilitating for those banks and the Russian economy.” The Russian government will find alternative ways to trade with other countries, “even if there is debilitating sanctions from the European Union or U.S.”
